Question

The Struter Partnership has total partners' equity of $400,000, which is made up of Main, Capital, $280,000, and Frist, Capital, $120,000. The partners share net income and loss in a ratio of 81% to Main and 19% to Frist. On November 1, Adison is admitted to the partnership and given a 20% interest in equity and a 20% share in any income and loss. Prepare journal entries to record the admission of Adison for a 20% interest in the equity and a 20% share in any income and loss under independent assumption. (1) Record the admission of Adison with an investment of $100,000 for a 20% interest in the equity and a 20% share in any income and loss. (2) Record the admission of Adison with an investment of $135,000 for a 20% interest in the equity and a 20% share in any income and loss (3) Record the admission of Adison with an investment of $70,000 for a 20% interest in the equity and a 20% share in any income and loss. View transaction list View journal entry worksheet No General Journal Credit Transaction (1) Debit 100,000 Cash Adison, Capital 100,000 135,000 Cash Adison, Capital Main, Capital Frist, Capital 107.000 83,000

Answer 1

1) Adison invests 100,000 $
Calculation of Hidden/Implied Goodwill
Capital brought-in by Adison = 100,000$
Adison's share in equity investment = 20%
Implied Partnership valuation = 100,000/20% = 500,000$
Total capital of Partners = 400,000$ (Existing) + 100,000$ (Additional capital brought-in) = 500,000$
Hidden Goodwill = Total capital including capital brought in by new partner - Implied Partnership valuation = 500,000-500,000 = Nil
Journal entries to be passed
S. No.	Particulars	Debit ($)	Credit ($)
1	Cash a/c ..Dr	1,00,000
	To Adison's Capital a/c		1,00,000
2) Adison invests 135,000 $ - This is case of hidden goodwill where investment is at greater than book value
Calculation of Hidden/Implied Goodwill
Capital brought-in by Adison = 135,000$
Adison's share in equity investment = 20%
Implied Partnership valuation = 135,000/20% = 675,000$
Total capital of Partners = 400,000$ (Existing) + 135,000$ (Additional capital brought-in) = 535,000$
Hidden Goodwill = Total capital including capital brought in by new partner - Implied Partnership valuation = 675,000-535,000 = 140,000
Hidden goodwill of 140,000 $ allocated to Main and First on basis of PSR of 81%:19% :
Particulars	Amount ($)
Hidden goodwill	1,40,000
Main : 81%	1,13,400
First : 19%	26,600
Journal entries to be passed
S. No.	Particulars	Debit ($)	Credit ($)
1	Cash a/c ..Dr	1,35,000
	To Adison's Capital a/c		1,35,000
2	Goodwill a/c ..Dr	1,40,000
	To Main's Capital a/c		1,13,400
	To First's Capital a/c		26,600
3) Adison invests 70,000 $ - This is case of hidden goodwill where investment is at less than book value
Calculation of Hidden/Implied Goodwill
Existing partner capital = 400,000 $
Exkisting Partner share = 100% - 20%(of Adison) = 80%
Implied Partnership valuation = 400,000/80% = 500,000$
Total capital of Partners = 400,000$ (Existing) + 70,000$ (Additional capital brought-in) = 470,000$
Hidden Goodwill = Implied Partnership valuation - Total capital including new partner's capital = 500,000 - 470,000 = 30,000 $
This Hidden goodwill is to be entirely allocated to the new partner as it is at less than book value.
Journal entries to be passed
S. No.	Particulars	Debit ($)	Credit ($)
1	Cash a/c ..Dr	70,000
	Goodwill a/c ..Dr	30,000
	To Adison's Capital a/c		1,00,000